Why is pricing not management's top priority?

In my capacity as a pricing consultant, I have always maintained that pricing should be an integral part of a solid business strategy. When deciding which businesses to invest in, Warren Buffett has made pricing power a key consideration. Kazuo Inamori, another great mind, also underlined the significance of pricing and held the view that top management should be in charge of price management.

But you are always faced with harsh realities. In the majority of the businesses I have dealt with, top management does not place a great deal of emphasis on pricing.

I hear the unspoken words loud and clear:

Naturally, I can come up with a thousand and one arguments to refute that and demonstrate how wrong this understanding of pricing is. But there is no real way to change their minds if you cannot see things from their point of view. So I tried, and came up with four arguments that deny pricing its holy grail status.

1. Cutthroat competition

Pricing is viewed more as an instrument of defense. That is to say, the price is not worth actively managing when the company's competitive position in the market is constantly on the line. Instead, the price can be sacrificed at any time as a resource in exchange for sales.

2. Mediocrity

Companies that lack innovation prowess tend to imitate what the market leader does. There is literally nothing that cannot be copied: positioning strategies, product features, marketing strategies, sales strategies, you name it. Logically, pricing strategy is no exception. It would be too dangerous to do it differently from the market leader.

3. Uniqueness

Innovativeness leads to uniqueness, while casting a cloud over the importance of pricing. Time and again, I wonder why pricing appears less sophisticated than one would expect at great tech companies like Amazon, Google, Facebook and Huawei. It must have to do with the fact that nobody at the executive level in these organizations looks after pricing, as Inamori urged.

That said, alpha wolves like NVIDIA seem to enjoy pricing serendipity. Thanks to the uniqueness of their products, these companies have plenty of time and opportunity for pricing trial and error. A deviation of 10% either way from the perfect price is unlikely to have any material impact on their valuation, which is often only weakly correlated with PE ratios, after all.

4. Distance to the bottom line

Pricing consultants brag about pricing's leverage effect on profitability as a key argument for persuading clients to take pricing seriously. To illustrate: if a company's net profit margin is 10%, it can increase its net profit by 100% by raising its price by 10%, everything else being equal. Simple yet powerful math.

The distance between the top line and the bottom line of an income statement gives pricing its leverage, but at a cost: growing uncertainty about whether the leverage will work. For a 10% price increase to deliver a 100% profit boost, numerous obstacles would need to be overcome. Ceteris paribus is a big question mark.